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Mean–Variance portfolio selection in presence of infrequently traded stocks

Listed author(s):
  • Castellano, Rosella
  • Cerqueti, Roy

This paper deals with a mean–variance optimal portfolio selection problem in presence of risky assets characterized by low-frequency trading and, therefore, low liquidity. To model the dynamics of illiquid assets, we introduce pure-jump processes. This leads to the development of a portfolio selection model in a mixed discrete/continuous time setting. We pursue the twofold scope of analyzing and comparing either long-term investment strategies as well as short-term trading rules. The theoretical model is analyzed by applying extensive Monte Carlo experiments, in order to provide useful insights from a financial perspective.

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File URL: http://www.sciencedirect.com/science/article/pii/S0377221713003226
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Article provided by Elsevier in its journal European Journal of Operational Research.

Volume (Year): 234 (2014)
Issue (Month): 2 ()
Pages: 442-449

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Handle: RePEc:eee:ejores:v:234:y:2014:i:2:p:442-449
DOI: 10.1016/j.ejor.2013.04.024
Contact details of provider: Web page: http://www.elsevier.com/locate/eor

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  1. Rambaud, Salvador Cruz & Pérez, José García & Sánchez Granero, Miguel Ángel & Trinidad Segovia, Juan Evangelista, 2009. "Markowitz's model with Euclidean vector spaces," European Journal of Operational Research, Elsevier, vol. 196(3), pages 1245-1248, August.
  2. Harry Markowitz, 1952. "Portfolio Selection," Journal of Finance, American Finance Association, vol. 7(1), pages 77-91, March.
  3. Koichi Matsumoto, 2006. "Optimal portfolio of low liquid assets with a log-utility function," Finance and Stochastics, Springer, vol. 10(1), pages 121-145, January.
  4. Leippold, Markus & Trojani, Fabio & Vanini, Paolo, 2004. "A geometric approach to multiperiod mean variance optimization of assets and liabilities," Journal of Economic Dynamics and Control, Elsevier, vol. 28(6), pages 1079-1113, March.
  5. Duan Li & Wan-Lung Ng, 2000. "Optimal Dynamic Portfolio Selection: Multiperiod Mean-Variance Formulation," Mathematical Finance, Wiley Blackwell, vol. 10(3), pages 387-406.
  6. Paul A. Samuelson, 2011. "Lifetime Portfolio Selection by Dynamic Stochastic Programming," World Scientific Book Chapters,in: THE KELLY CAPITAL GROWTH INVESTMENT CRITERION THEORY and PRACTICE, chapter 31, pages 465-472 World Scientific Publishing Co. Pte. Ltd..
  7. Alessandra Cretarola & Fausto Gozzi & Huyên Pham & Peter Tankov, 2011. "Optimal consumption policies in illiquid markets," Finance and Stochastics, Springer, vol. 15(1), pages 85-115, January.
  8. Merton, Robert C, 1969. "Lifetime Portfolio Selection under Uncertainty: The Continuous-Time Case," The Review of Economics and Statistics, MIT Press, vol. 51(3), pages 247-257, August.
  9. Easley, David, et al, 1996. " Liquidity, Information, and Infrequently Traded Stocks," Journal of Finance, American Finance Association, vol. 51(4), pages 1405-1436, September.
  10. Framstad, Nils Chr. & Oksendal, Bernt & Sulem, Agnes, 2001. "Optimal consumption and portfolio in a jump diffusion market with proportional transaction costs," Journal of Mathematical Economics, Elsevier, vol. 35(2), pages 233-257, April.
  11. Leung, Pui-Lam & Ng, Hon-Yip & Wong, Wing-Keung, 2012. "An improved estimation to make Markowitz’s portfolio optimization theory users friendly and estimation accurate with application on the US stock market investment," European Journal of Operational Research, Elsevier, vol. 222(1), pages 85-95.
  12. Huyên Pham & Peter Tankov, 2008. "A Model Of Optimal Consumption Under Liquidity Risk With Random Trading Times," Mathematical Finance, Wiley Blackwell, vol. 18(4), pages 613-627.
  13. Hakansson, Nils H, 1971. "Multi-Period Mean-Variance Analysis: Toward A General Theory of Portfolio Choice," Journal of Finance, American Finance Association, vol. 26(4), pages 857-884, September.
  14. Aase, Knut Kristian, 1984. "Optimum portfolio diversification in a general continuous-time model," Stochastic Processes and their Applications, Elsevier, vol. 18(1), pages 81-98, September.
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